Formerly known as PEST analysis, PESTEL is the short form for a macro-environmental tool used to identify and strategically analyze the external factors that impact a company. The acronym stands for ‘Political’, ‘Economic’, ‘Social’, ‘Technological’, ‘Environmental’, and ‘Legal’ factors. However, based on the company, it can be abridged to PEST or in some cases another letter is ‘I’ can be added to include International factors affecting the company.
In any business, it is imperative to conduct a circumstantial review before any type of tactical plan or strategy can be implemented. PESTEL analysis is a part of that review and is done at regular intervals to identify developments in the business environment. Companies that successfully examine and deal with changes in the business environment can set themselves apart from the competitors and gain a competitive lead.
Here is a brief explanation of the different factors studied under PESTEL analysis:
Political:These factors determine the level to which government and its policies can impact a company or a particular industry. These include political policies, government stability, and trade, financial, and taxation policies.
Economic:These factors influence the economy of a nation and its working, which directly affects the company and its productivity. These include employment rates, redundancy rates, foreign exchange rates, interest rates, and cost of raw materials.
Social:These factors address the social environment and discover upcoming trends. This helps an employer to recognize their customers’ requirements and demands. These include cultural trends, shifting family demographics, outlook changes, education levels, and lifestyles changes.
Technological:These factors reflect on the speed of technological development and innovation that could influence a business or industry. These include advancements in mobile or digital technology, computerization, research, and improvement. Often, people have a tendency to concentrate on only the advancements in technology, but it is necessary to focus on the innovative methods of manufacturing, distribution, and logistics.
Environmental:These factors are connected with the impact of the external environment and the ecological aspects. These include climatic conditions, carbon footprint, recycling procedures, waste management, and sustainability. The growing significance of Corporate Sustainability Responsibility (CSR) has made it an important element of the macro environment.
Legal:A company must be aware of what is officially authorized and acceptable within the regions they work in. They should also have the knowledge of any changes in law enactment and how can it impact the business operations of the company. These include employment rules, health and safety policies, consumer law, global trade rules as well as restrictions.
Often, Political factors are coupled with legal factors. However, it should be noted that while the political issues are regulated by the government, the legal factors have to be adhered to.
The significance of these factors depends on the type of industry or the company. For instance, Economic factors are crucial for the bank sector whereas the Environmental factors are crucial for the tourism industry.
Advantages of a PESTLE Analysis
- The technique is easy to understand and simple to use.
- It fosters the development of strategic views.
- It helps in developing a better understanding of the business environment.
- It enables companies to identify new opportunities and take advantage of them effectively.
- It helps in reducing the impact of potential business threats.
Disadvantages of a PESTLE Analysis
- This technique over-simplifies the data that the companies used. By doing this, it is possible that users might miss out some very important data.
- The tool requires regular updating in order to remain effective.
- It works best when the users are from different departments and of varying viewpoints.
- The users have to access information sources on their own which is expensive and time-consuming.
- Most of the information used for PESTEL analysis is hypothetical.
- Seeing the market environment is changing so drastically, it is extremely difficult for companies to foresee developments.
How to utilize PESTLE Analysis?
- Start by listing all PESTLE factors and analyze with experts.
- Recognize the repercussions of each possibility revealed through the analysis. This will help in assessing their impact in due course, in terms of its type and tendency.
- All possibilities must be categorized based on their significance or exigency. For instance, the events can be categorized under not important, important, very important, and very, very important.
- Based on these categories, teams can work on strategies to deal with the issues in the order of their priority.
If utilized suitably, the PESTLE analysis is an extremely effective tool. It helps in understanding the market and business status. Together with SWOT Analysis, the PESTLE Analysis can be implemented as a method for studying the business environment and the factors impacting it.
Here is an example of how the HR department of a company can benefit from the PESTLE analysis technique:
- List the HR Policies of the company
- Identify the political leaders of HR
- How the shareholders and other entities view the HR functions of the company?
- The financial standing of the company
- Official funds for HR department
- Impact of inflation
- Income trends in the industry
- Customer’s readiness to pay for the company’s services
- Attitudes of other departments towards HR
- Age and Education level
- Automation of HR processes
- Communication technology
- Working hours
- Minimum wage
- Employee involvement
- Company’s behavior and culture
Importance of PESTLE Analysis
The tool can be used to study the existing and upcoming position that a company holds in the industry. This will facilitate in the strategic forecast and outsmarting the competition in the industry. In addition to analyzing the company as a whole, this framework can be used for inspecting the various departments in a company. It makes sense for a company dealing with a diversified product variety to examine its departments individually than the entire company altogether.
The PESTEL analysis aids a company to identify the uncontrollable forces that act in a market and how they could have a direct bearing on the business. The chief objective of conducting this analysis is not just to identify the macro environment factors but to also assess them and their impact on the company. The results of the PESTEL analysis could then be employed to utilize the threat and opportunities in a SWOT analysis.